The euro and economic crisis

The euro hit a new recent low against the dollar after our last article said it had medium-term reason to go even beyond a 14-month low. The euro is now at an even lower low, back at November 2008 levels.(1)

The 7-year U.$. Treasury bond is yielding only 2.87% and the 10-year, 3.45%.(2) Such returns could be justified if bond-holders were certain that the United $tates is headed for deflation or a “lost decade.” However, the bond-bidders would have to be 100% certain that deflation or “lost decade” stagnation is guaranteed. Given the money-printing of the U.$. federal government and how that is related to the structural trade deficit contrary to what some might say, the long-term U.$. bond investments look foolish.

The Canadian 10-year rate is 3.43%.(3) Canada just had its first trade deficit in the 35 years.(4) The gap is not much percentage-wise.

“Canada has emerged from the recession in better shape than most other major economies. Mr Flaherty estimates a debt-to-GDP ratio of 34 per cent this year, by far the lowest of the G7 industrial countries. The International Monetary Fund estimates the ratio for the US at 67 per cent and the UK at 75 per cent.

The unemployment rate in Canada, now at 8.3 per cent, is 1.4 percentage points lower than in the US. The banking system has survived without direct government bail-outs, and several banks have reported sharp profit increases in recent days.”(5)

True, the United $tates has already suffered a “lost decade” for the stock market, with the Dow Jones Industrial Average at 2000 levels. The NASDAQ has yet to recover to 2000 levels. That’s looking backwards, however. The U.$. stock market is limited by structural factors going forward that may be artificially reducing bond rates.

Although the United $tates is Japan in the sense of having an aging population in a technologically advanced economy, the United $tates is not Japan in a capital accumulation or immigration sense. The United $tates allows immigration and females hold the majority of white collar management jobs, thereby leaving large portions of men available for work should the economy require them. The United $tates could wind up with deflation and a “lost decade” ahead, but it’s not a basket to put all one’s eggs in. No government officials will talk about stagflation for fear of spooking the economy in the midst of Keynesian pump-priming, but such psychological posturing is irrelevant to 7 and 10-year yields.



One Response to “The euro and economic crisis”

  1. Daily update « Mimdefense’s Weblog Says:

    […] Economist Noriel Roubini pointed to the possibility of bond vigilantes’ attacking U.$. interest rates. My own comments on this are here. […]

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